Risk and Reward

• Stock beta ratings are sometimes used to determine how safe or how risky a stock is. Stocks with higher beta ratings may be considered riskier than stocks with lower ratings because while they rise faster during bull market conditions, they can also lose more money during bear market conditions. Greater risk can often translate into greater reward potential as well. When stock prices are rising, stocks with higher beta ratings should gain value more quickly than stocks with lower ratings.
  
  

Value Investing

• Risk is in the eye of the beholder. Value investors operate under the theory that investor risk decreases during bear market conditions when stock prices are falling. For example, if Coca Cola stock is valuable at $100 a share, it is even more valuable if its share price is reduced to $80 due to bear market conditions.
  
  

Shortcomings

• Beta ratings are determined based on a stock's past performance history; they do not foretell the future. Sometimes companies that were in the past comparatively risky can become less risky as their market share increases or markets shift. For example, Walmart stock had a higher beta rating when it was a new company. As Walmart began to change the retail environment in the country and take over market share, its price became increasingly more stable and its beta rating decreased.
  
  

Other Risks

• Beta ratings cannot account for all possible risks investors will be exposed to when they invest in company stock. Enron, for example, was once considered a very stable company for investors and had a relatively low beta rating. As investors were made aware of accounting discrepancies and fraud, the price of the stock began to plummet. Thus, when determining how much risk a stock has, it is important to not rely entirely on beta ratings.